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show work....if not may lead to a poor rating in january 2006 the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later
show work....if not may lead to a poor rating in january 2006 the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later the yield on these same bonds had climbed to about 6 percent because the Fed Reserve increased interest rates during the year. Assume that IBM issued a 10-year, 5 % coupon bond on Jan 1 2006. On the same date Microsoft isued a 20 year 5% coupon bond. Both bonds pay interest annually. Also assume that the market rate on similiar risk bonds was 5% at the time the bonds were issued a. compute the market value of each bond at the time of issue b. compute the market value of each bond 1 year after issue if the market yield for similar risk bonds was 6% on Jan 1 2007 c. compute the 2006 capital gains yield for each bond d. compute the current yield for each bond in 2006 e. compute the toatl return that each bond would have generated for investors in 2006 f. in you invested in bonds at the beginning of 2006 would you have been better off if you held long term or short term bonds? Explain why g. assume that interest rates stabilixe at the jan 2007 rate of 6% then they stay at this level indefinitely. What would be the price of each bond on Jan 1 2012 after 6 years from the date of issue have passed? Describe what should happen to the prices of these bonds as they approach their maturitie
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